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Privatization and efficiency: a mixed oligopoly approach

Tai-Liang Chen ()

Journal of Economics, 2017, vol. 120, issue 3, 251-268

Abstract: Abstract While models of mixed oligopoly have been analyzed within a rapidly growing literature, little is known about the mechanism of efficiency improvement relating to partial privatization. In this paper, we endogenize efficiency improvement in relation to the level of privatization. We show that in the short run, an improvement in efficiency associated with a state-owned firm reduces the output substitution among firms, and that the reduction in output substitution effect is proportional to the strength of the improvement in efficiency. Specifically, if the effect of efficiency improvement is sufficiently small, the magnitude of the improvement of social welfare is reduced. In the literature, the optimal policy in the long run is full nationalization. However, we argue that the optimal policy for a state-owned firm is partial privatization. Moreover, efficiency improvement provides the impetus for indirect entry regulation of private entrants.

Keywords: Cost differentials; Efficiency-enhancing effect; Mixed oligopoly; Privatization (search for similar items in EconPapers)
JEL-codes: H42 L13 L32 L51 (search for similar items in EconPapers)
Date: 2017
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Handle: RePEc:kap:jeczfn:v:120:y:2017:i:3:d:10.1007_s00712-016-0502-8